Low cost airlines more profitable than the big guns

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Low cost airlines more profitable than the big guns

The worldwide trend in the airline industry towards budget or so-called low-cost carriers (LCCs) is, of course, driven by profit margins, and the recent release of figures by three of Thailand’s major airline players highlights the differentials.

Thai Air Asia (TAA), Nok Air, and Thai Airways International (THAI) are all listed on the Stock Exchange of Thailand (SET) and their results show that the first two, both LCCs, are easily outperforming the flagship THAI airline when it comes to profitability as expressed in percentage terms.

In the first quarter of 2013 Nok Air achieved a net return of 14 percent while TAA, which is Thailand’s largest low-cost carrier, saw a net return of 12 percent. By comparison, THAI recorded a 9.8 percent return on equity. This compared to just a 2.3 percent return on assets for all of 2012 for THAI, so at least the percentages are moving in the right direction for THAI’s management.

Among the reasons cited for the better figures coming out of the LCCs is they have relatively lower productivity costs and more streamlined operating systems.

Additionally, LCCs operate newer aircraft such as the A-320 for TAA and B-737-800s for Nok Air, both of which deliver better fuel economy compared to the older airliners operated by THAI airways.

Also, LCCs usually lease their aircraft and this avoids the heavy capital expenditure of the more traditional airlines.

When it comes to ticketing, LCCs have embraced the Internet with the majority of their tickets purchased via this medium whereas THAI and other major international airlines use the Global Distribution System.
The latter are also hampered by the cumbersome Billing and Settlement Plan operated by the International Air Transport Association (IATA) which means bills are usually not settled for up to a week. By contrast, LCCs receive their income directly from booking passengers.

Finally, the number of employees used on LCC flights is usually lower in manpower terms than the bigger and more expensive carriers like THAI as the TAA and Nok Air flight staff carry out a range of tasks designed to even the workload.

Tassapon Bijleveld, the CEO of Thai Air Asia, is reported as saying he wants to ramp up TTA’s profit margin to 15 percent over the next few years. Nok Air’s chief financial officer, Vitai Rattanakorn, has apparently claimed his airline will be able to sustain its double-digit growth forecast for 2013. THAI has yet to release any kind of profit projections for the rest of this year.

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